Managing Commodity Supply Chain Disruptions
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The chemical industry, where I have spent my entire career, is a reliable bellwether of manufacturing trends generally and supply chain issues specifically. A wide range of industries use chemical products as a raw material. As a result, how the chemical industry has coped with the upheavals of the past few years, especially those related to supply chains, and what it has learned probably can be of value to those in other industries who face disruptions in commodity supply chains.
Impact of Russia/Ukraine
While the COVID pandemic caused massive supply chain problems in consumer and business-to-business manufactured goods, recent commodity supply chain problems are more a result of the volatility in oil and gas prices that resulted from Russia’s invasion of Ukraine and the subsequent sanctions by the European Union and the United States. The upheaval in pricing has had a tumultuous effect on the chemical industry, which accounts for about 16% of global oil and gas consumption due to the heavy use of petroleum products as a feedstock in manufacturing.
Oil has almost doubled in price since last year. In gas, the issue is more about availability. European countries are highly dependent on Russian gas supplies, particularly major manufacturing companies, which means that Germany and other countries with big manufacturing facilities don’t really have a lot of alternatives in the short to medium term as Russia tries to tie gas availability and pricing to its political agenda in Ukraine.
Supply Chain and the Chemical Industry
How has our canary in the coal mine, the chemical industry, coped with this jump in commodity prices?
If we look at the experience of some large chemical companies, we see that the world’s largest chemical company, BASF, reported higher energy and raw material prices in the first quarter, but also greater sales revenue as higher prices offset slightly lower volumes. Profitability increased. So, lesson number one is that passing on higher energy and higher raw material costs can work.
Dow told a similar story. There was year-over-year and quarter-versus-previous-quarter growth, despite higher energy costs, because costs were passed down. The company’s largest business segment, plastics, also saw growth in sales but a decline in EBIT margin.
But that was the first quarter; the rest of the year may look different given the ongoing Ukraine situation. The longer-term issue is whether customers will continue to be willing to pay higher prices. If they decide to cut back, at what point will that lead to a recession?
Managing Supply Chain Disruptions
From a supply chain perspective, what should a company facing commodity supply chain disruptions do?
First, it must put in place strong processes. This requires an approach in which sales, operations, and finance are integrated to prevent silos from developing and impeding the accomplishment of companywide goals.
Next, the right people must be in place to execute those processes. That means having highly skilled, highly trained, and highly empowered people who are close to the information they need and who can react quickly and make decisions without having to go up through layers of bureaucracy.
But key to everything is technology. Getting real-time information into the hands of the right people is critical. In the chemical business, for instance, having up-to-the-minute information about raw material supplies is critical, so as oil prices and availability constantly shift, production planners know precisely when a vessel loaded with naphtha, for example, a raw material necessary for polyethylene manufacture, is due to arrive at a production site. Given that the chemical industry is typically several steps back in the chain, it’s essential to understand what is happening at the end-consumer level in order to forecast upcoming demand. Systems, people, and technology, therefore, are what are necessary to manage disruptions in commodity supply chains.
About Peter Marshall
A chemical industry veteran, Peter Marshall recently retired from Dow Inc. as a Senior Logistics Director. In his 37-year career at Dow, he held leadership positions in process research, manufacturing, and supply chain management, with assignments in six countries and multiple business units. He has experience in all aspects of supply chain management and has worked with organizations, including the European Petrochemical Association and the Chemical Distribution Institute.
This chemical industry article was adapted from the GLG Webcast “Commodities Supply Chain Disruption.” If you would like access to events like this or would like to speak with chemical industry experts like Peter Marshall or any of our approximately 1 million industry experts, please contact us.
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